Back to the Barricades

Free markets are under attack again.

September 24, 2008, should go down in the history books as a day of infamy. And clarity.

That's when President George W. Bush looked into the eyes of anxious Americans and told them they weren't being nearly anxious enough. "America could slip into a financial panic," he warned (or was it threatened?), just hours before Washington Mutual became the biggest bank to fail in U.S. history without generating as much as a fluttered eyelid from blasé depositors (including me). "Millions of Americans could lose their jobs," he said, one week before new federal data showed unemployment unchanged at 6.1 percent, lower than it was for any month between January 1980 and June 1987. "The value of your home could plummet," he added, the same day new August housing figures showed the median U.S. house price to be $203,100. While down $73,000 in real terms from the height of the bubble two years ago, that's still a full 40 percent higher than it was at the beginning of 1997.

Aside from the innumerate hysteria, Bush sketched a worldview in which the federal government is single-handedly responsible for making sure all assets appreciate indefinitely. "The stock market would drop even more, which would reduce the value of your retirement account," he said, as if Americans were forced at gunpoint to invest for their retirement in equities instead of bonds or commodities. "Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college," he said, as if he didn't understand that the financial crisis was triggered in the first place by unprecedented access to easy credit.

If you want to know when this country's political class, even those hailing from the allegedly pro-market Republican Party, lost faith in the single greatest economic organizing principle ever devised by mankind, look no further than the following six terse sentences from Bush's decidedly unpresidential speech: "I'm a strong believer in free enterprise. So my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances. The market is not functioning properly." Italics mine, to highlight the favored lament of reluctant central planners everywhere.

Bush's laundry list of horror was not predictive; it was conditional. We could avoid the cruel fate of "a long and painful recession" if and only if Congress agreed right now to allocate around $700 billion more in money it doesn't have so the Federal Reserve could use powers it never previously contemplated to buy up huge swaths of "toxic" mortgage-related financial instruments no bank currently wanted to sell (except to the government, at a premium above the market price). The details weren't important; as House Financial Services Committee Chairman Barney Frank (D-Mass.) said at the start of bailout negotiations, "We don't have a choice now of debating whether this is a good or a bad thing." The elite opinion leaders in Washington and New York were nearly unanimous in their contention that only deeply irresponsible "nihilists" (in New York Times columnist David Brooks' phrase) and the "lunatic fringe" of "wing nuts" and "zealots" (The Washington Post's Dana Milbank) failed to recognize the urgent need for massive yet vague reregulation. "The fine points of financial reform can wait," The Washington Post's editorial board thundered. "For Congress, the immediate task is to avert economic disaster."

And it wasn't just the Bush administration and a bunch of newspaper columnists talking imminent collapse. GOP presidential nominee John McCain predicted that should a bailout fail to pass, "the present crisis will turn into a disaster," and "the gears of our economy will grind to a halt." Sen. Hillary Clinton (D-N.Y.) warned that "this is a sink-or-swim moment for America." Many commentators pointed to the 778-point drop in the Dow Jones Industrial Average on September 29, the day the House of Representatives temporarily rejected the bailout package, as proof that (in Milbank's words), "in the Congress of the United States, the insane are now running the asylum." When the Dow dropped 800 points the first full trading day after the bailout bill passed, most of the Dow-drop-proves-it crowd was oddly silent.

Political hyperbole and editorial board do-somethingitis aside, there is no exaggerating the importance of this moment. While congressional Republicans wobbled and eventually caved (see "Atlas Blinked," page 18), the Democrats were ready from day one to cooperate with the Bush administration's power grab. Polls in late September and early October showed the crisis had a beneficial impact on not just Democratic presidential nominee Barack Obama but also a variety of down-ticket Democratic legislators. If the party that cares even less about markets converts anti-market rhetoric into electoral gains, and tops that off with a Democratic president who ran to the economic left of Bill Clinton, Al Gore, John Kerry, and arguably even Howard Dean, we could find ourselves come January with an immediate governing crisis.

But I would suggest that something even deeper is afoot. When a Republican administration arbitrarily (and "temporarily") bans short selling just one decade after Malaysian Prime Minister Mahatir bin Mohamad was globally (and deservedly) mocked for blaming his country's self-inflicted woes on "speculators," when a Republican presidential nominee unleashes retrograde attacks against the "casino culture" of Wall Street "greed," and when a Democratic Congress holds nearly daily hearings suggesting any number of "windfall profits" taxes and forced reductions in private-sector CEO pay, that sound you hear is a fragile consensus shattering and a warning bell clanging in the night.

After the collapse of communism and the attendant discrediting of Marxian economic models, the industrialized world more or less settled on democratic capitalism as the best available option for countries to grow and prosper (see "The Libertarian Moment," page 62). Old Europe slashed government involvement in industry, New Europe rode mass privatization to massive growth, East Asian countries went from emergingmarket "tigers" to full-fledged market economies, and China used markets to yank hundreds of millions up from poverty. One could perhaps be forgiven for thinking the 20th century's great economic argument had been settled.

Well, no more.

In June I read what I thought I'd never see again: a mainstream column, by a mainstream columnist (The Washington Post's David Ignatius), arguing against the effects of airline deregulation, one of the most liberating government acts of the last four decades (see "40 Years of Free Minds and Free Markets," page 28). When reregulation is suddenly on the table even for an industry where market forces have cut prices in half while doubling the customer base, it's time to get back to first principles and fight like hell to secure victories we'd long thought won.

It is times like these that reason magazine was made for, 40 years ago. As we argue throughout this commemorative anniversary issue, many aspects of our lives are considerably better than they were in 1968, but some old debates never die. Now that the historic 2008 bailout-the ramifications of which we'll be sorting out for as long as, if not longer than, those of the equally rushed PATRIOT Act of 2001-has been signed into law, there has rarely been a more fitting time to engage in the basic argument that it is capitalism, not "emergency" intervention from Washington, that makes us freer, more prosperous, and more interesting. We hope we won't be making these same arguments 40 years from now, but we're fully prepared to do so if necessary.

Matt Welch is editor in chief of reason.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Lefiti||

    No, Matt, the bailout saved capitalism. It's happened before. Of course, I'm talking about real, existing capitalism, not the version of your fervid libertarian imagination. Let's hope those donations keep coming in because this nonsense won't sell.

  • Lefiti||

    American capitalism will soon look a lot more like European capitalism. Libertarians are on the wrong end of a watershed.

  • cunnivore||

    While congressional Republicans wobbled and eventually caved (see "Atlas Blinked," page 18),

    It's not right to taunt the non-subscribers, Matt.

  • ||

    Lefiti,
    You are so right. The stock market just keeps going down down down. The government is the only source of wealth in these trying times. The problem with the bailout is that it's too small and poorly enacted. The Treasury should write a check for $1,000,000.00 to every citizen. Then we'd all be rich! Financial crisis averted!

  • BDB||

    Don't forget to raise the minimum wage to $100/hour, Warren.

  • ||

    BDB,
    Once we're all wealthy they'll be no need for a living wage. People will do the jobs the want to do. There probably won't even be a paid labor force.

  • BDB||

    Truly, Warren, the Lefiti "school" of economics is the future!

    What say you, Lefiti?

  • The Magic of Regulation and Re||

    If only we had regulated the regulators which in turn were regulated by expert regulators immune from all greed, this never would've happened.

    There is this amazing thing that happens to people when they begin serving the public as public servants. All greed and selfishness flees from them and goodness takes over.

    It's kind of like what happens to liquids and gels once you put them in zip-loc bags before passing TSA security at the airport.

  • Central Planner||

    We need to outlaw markets. They are inherently dishonest. Just the other day I saw half a watermelon for sale at Whole Foods Market...and a cow cut up into at least a hundred pieces.

  • sage||

    Good one, central planner. Also, I opened a box of Grape Nuts - no grapes, no nuts! TF?

  • Yves-dropper||

    Overheard on an airplane:

    Stewardess: "Red Wine? That'll be $5."

    French Woman: "What? I have to pay for the wine? Why don't you just raise the price of the tickets and give us the wine for free?"

  • ||

    The virtues and benefits of limited government are apparently not as self-evident as I believe them to be. Every single day, I hear people saying, "They [our wise and benevolent masters] hafta/oughta do something about _______!"

    And plenty of huffing and puffing ensues, when I ask, "Why?".

  • BDB||

    "French Woman: "What? I have to pay for the wine? Why don't you just raise the price of the tickets and give us the wine for free?""

    I'm sorry you had to hear that. That must have made your head hurt the rest of the day.

  • Mike M.||

    American capitalism will soon look a lot more like European capitalism. Libertarians are on the wrong end of a watershed.

    In other words, we're close to losing our first world status and becoming a second world country. That is indeed a "watershed" of sorts, but it's not what I'd call a good one. You may seriously believe that us moving in the direction of the dying countries of western Europe is comforting, but I find it depressing.

    And when the day comes that the nation is bankrupt and our currency is virtually worthless, then it's hello third world nation.

  • ||

    French Woman: "What? I have to pay for the wine? Why don't you just raise the price of the tickets and give us the wine for free?"

    Shit, you were on a flight with lefiti?

  • damon||

    Well, if you guys want to fight like hell for this kind of change, maybe we could start by stepping out of the echo chamber and thinking of some good talking points, then try to get some lefties on board with our ideas.

    Because grousing at Reason.com isn't exactly going to change any minds out there.

  • Kay \"Bail-out\" Hutchison||

    Hi, I am Kay "Bail-Out" Hutchison, the future of the Republican Party.


    Thank you for contacting me regarding the Emergency Economic Stabilization Act of 2008. I welcome your thoughts and comments on this issue.

    On September 19, 2008, Treasury Secretary Henry Paulson announced a plan by the Bush Administration to stabilize the financial services sector of the economy. This plan included broad authority for the Treasury Secretary to purchase troubled financial instruments with very limited oversight and few protections for taxpayers...
    In the days following the Treasury Secretary's announcement, concerns about the danger to the broader economy deepened...
    Despite this realization, I was still not inclined to support the Paulson plan. After weeks of negotiation, however, a bi-partisan compromise was reached. While there are provisions in the bill that I do not favor and would not have drafted, overall the need for action to stabilize the market and to protect the retirement savings of millions of Americans weighed heavily on my mind. Ultimately, I supported the Senate bill along with 73 of my colleagues. The bill we passed was a major improvement over the initial plan announced by Secretary Paulson...

  • thanks||

    The comments for this article are golden. You all made my day a little brighter.

  • Seward||

    Matt Welch,

    I thought comparing the bailout to the PATRIOT Act was a good way of looking at the issue. It is something I've been thinking a lot myself lately.

  • Argon||

    "President-elect Barack Obama is unlikely to radically overhaul controversial Bush administration intelligence policies, advisers say,"

    So, libertarians didn't get any movement on the issue they spent the most time complaining about, but at least we get a big steaming mound of socialism on top of the existing problems.

    As nice as it was to see John "What First Amendment?" McCain choke on his own campaign finance reform, this election was probably an even bigger loss for libertarians than for conservatives.

  • joe||

    If only we had regulated the regulators which in turn were regulated by expert regulators immune from all greed, this never would've happened.

    Exactly, you just need the right people.

    I mean, I didn't say a word about people!

  • HAL-9000||

    I wonder if anybody on the bail-out bandwagon realizes the Chinese are going to want their money back someday?

    I even heard a dirty rumor they'd want interest on the money, sort of as a favor for their favor of loaning the Ivy League set all that money to bail themselves out with in the first place.

    At least with trade deficits the actual people who pay rack up the deficits are collectively choosing their obligations. But these bail-out schemes for the East Coast elites (Wall Street = right pocket, Government = left pocket, on the same suit...the SUIT OF THE MAN! tee-hee) both) to get themselves out of trouble and maintain that power structure is someone else putting me in the hole for their own interests. Central planning rox!

  • BDB||

    "I wonder if anybody on the bail-out bandwagon realizes the Chinese are going to want their money back someday?
    "

    It doesn't matter to the people doing it. They'll be dead!

    "Deficits don't matter!"--Dick Cheney

  • Bob Dole||

    Goddamn right deficits don't matter. I tried to pass a Balanced Budget Amendment, Dems killed it by one vote, and look where it got me as a campaign issue.

  • BDB||

    A party that wants a balanced budget is a party out of power at the time.

  • Argon||

    I wonder if anybody on the bail-out bandwagon realizes the Chinese are going to want their money back someday?

    No, the Chinese are digging their own hole here. They aren't buying our bonds to be nice to us. It's the same game Japan played in the 80s - inflate our currency's value, sell us their products at artificially low exchange rights.

    At this point they can't afford to stop riding the tiger. If they allow the value of our currency to adjust, they not only lose trillions on the investment, their export-based economy collapses.

    And China's banking sector makes ours look rock-solid by comparison.

  • adrian||

    pretty scary that we may still be the country with the best outlook.

  • Chinese preverb||

    In the land of the blind, the one-eyed man is king.

  • ||

    Ar

    It's the same game Japan played in the 80s - inflate our currency's value, sell us their products at artificially low exchange rights.

    So . . do you think the Chinese are overdue (or just "due") for a long term recession and stagnant economy, as Japan experienced in the 90's?

  • squarooticus||

    At this point they can't afford to stop riding the tiger. If they allow the value of our currency to adjust, they not only lose trillions on the investment, their export-based economy collapses.


    A way to avert financial collapse by securing enough reserves to get them through the down period when (not if) the dollar collapses would be for the Chinese to surreptitiously buy gold on the open market with their existing dollar reserves.

    Gold is at a huge discount in dollar terms at the moment: they'd be exchanging their soon-to-be-worthless dollars for something of real value while the value of dollars are still inexplicably high. At the same time, they'd be ensuring the US is in no position economically or militarily to challenge their rise by hitting the big red button on FRN's at a strategically-chosen time.

    It would be just like the Chinese to do something like this: they think for the loooooooong term.

  • Yap Realtors Assoc.||

    Move to Yap, the island of giant stone money. The only currency sure of surviving the current global financial crisis. You can even buy a wife with it!

  • ed||

    Let's hope those donations keep coming in because this nonsense won't sell.

    If trolls were rolls we'd all be asking for butter.

  • ||

    "...fight like hell to secure victories we'd long thought won..."

    What part of "the price of liberty is eternal vigilance" or "rust never sleeps" didn't get through?

    I have come to realize that victories in politics are seldom actual wins, and even when they are, they are seldom permanent in any reasonable sense of that word. Whenever somebody declares a "victory," or that something has finally been "established," those are only code words for "OK, that's enough effort in THAT direction for now .. take five and we'll start on something else next." The fact is that securing liberty is like painting the Golden Gate Bridge. It is always happening, never done. If you stop, even for a day or two, some corrosion sets in, and if you allow enough corrosion to accumulate, the whole thing comes crashing down when the next big quake hits.

  • thanks||

    Matthew:

    So . . do you think the Chinese are overdue (or just "due") for a long term recession and stagnant economy, as Japan experienced in the 90's?

    No, that's more likely the fate of the US. The Chinese are actually overdue for an economic boom. Once the dollar finishes it's collapse and loses it's reserve currency status, purchasing power is going to shift from Americans to the Chinese and the Chinese economic machine is going to adapt to that new market.

  • ||

    thanks,

    I virulently disagree. China inflates every positive economic number that comes out of it and low-balls "bad" economic indicators (like unemployment).

    China is due for an implosion, I promise you. Their economy really is a paper tiger.

  • Sam Grove||

    We can sell them women. They need lots of women.

  • thanks||

    TAO: Sounds like you just described the US economy to a T.

  • thanks||

    TAO: Sorry, I accidentally hit submit before finishing my thoughts. I also meant to include that you may very well be right, and that China is just like the US, but I'm betting on otherwise. They've got the manufacturing power and the population to really take advantage of more purchasing power.

  • ed||

    And no elections.

  • ||

    TAO,

    You're not the first to voice that opinion, but what is it based on? Just curious here . .

  • Lefiti||

    Paul Krugman has the ear of the incoming liberal Democratic administration. The only ears you've ever had are ears of corn. Eat your hearts out, free-market fundies!

  • HAL-9000||

    So long as China keeps its people locked up intellectually, they will never be a first-rate power. Fact is, the Chinese have done a good job as a society in imitating what they have seen as successful in the world. However no significant material or social innovation has come out of China for more than a hundred years (unless the Great Leap is a "significant innovation").

    Frankly that's what has kept America in business for the past forty or so years despite its best efforts to fiscally implode. For all the problems this country inflicts on itself, it still invents the internet, pioneers the digital revolution, and pushes the bounds of the biotech revolution. The impending age of private adventures and endeavors in outer space could be a tremendous gold mine, and will probably be sourced initially, just like the 'net, out of the USA.

    Ironically these things are what keeps the government in business despite itself. I think its funny to hear the Clinton crew talk about how ol' Bill (and Hillary too, I guess) shepherded our economy to glorious success in the '90's, even while Hillary infamously learned email just two years ago. Its not that these people want to choke the golden goose, its that they are so myopic they don't even see the goose when its honking in their faces!

    Now the USA has moved itself back to the fiscal implosion launch-pad, not that different of a situation than where we were circa 1993 (though with two wars and the new Department of Homeland Security and Enlightenment) there is no "peace dividend." With no internet-sized economic expansion and invention looming, I do not see how this country can create the capital necessary to bail-out (no puns here!) the political elites' mistakes this time. Hence, the implosion will occur, ironically on Uncle Obama's watch. Hope floats, but it doesn't float the dollar much longer!

  • ||

    "Matt Welch argues that it's time to get back to first principles and fight like hell to secure victories we'd long thought won."

    It's Veterans Day. I'm a veteran. The Marine Corps birthday was yesterday. Do you mind if I sit out this fight?

    Ruthless

  • kinnath||

    China inflates every positive economic number that comes out of it and low-balls "bad" economic indicators (like unemployment).

    I've been to Guanzhou and watched "teams" of young women cutting the grass in the median of an empty highway using hand tools.

    It the Chinese every find a way to gainfully employ the billions of adults that live there, they will overwhelm the world. However, I don't expect to see that anytime soon.

  • ||

    Editor in Chief Matt Welch argues that it's time to get back to first principles and fight like hell to secure victories we'd long thought won.

    And on that note, lets take a post-Heller look at Obama's announced plans for gun control:

    Address Gun Violence in Cities: As president, Barack Obama would repeal the Tiahrt Amendment, which restricts the ability of local law enforcement to access important gun trace information, and give police officers across the nation the tools they need to solve gun crimes and fight the illegal arms trade. Obama and Biden also favor commonsense measures that respect the Second Amendment rights of gun owners, while keeping guns away from children and from criminals who shouldn't have them. They support closing the gun show loophole and making guns in this country childproof. They also support making the expired federal Assault Weapons Ban permanent, as such weapons belong on foreign battlefields and not on our streets.

    And what unnamed "insiders" are whispering about:

    his people are seriously considering a federal ban or restriction on "right to carry" laws.

    Unsupported rumor, or trial balloon? Time will tell, no?

    Raising again that age-old question: So, how's that left/libertarian alliance working out?

  • Sleep Dirt||

    Outlaw loss!

    There oughta be a law saying that rich people can't sell financial stuff (like stocks, and houses) for less than they paid for them. That way things will never go down.

  • cunnivore||

    They also support making the expired federal Assault Weapons Ban permanent, as such weapons belong on foreign battlefields and not on our streets.

    I thought our streets were a battlefield in the war on drugs. Or do we drop war metaphors once they actually have consequences?

  • BDB||

    "
    The page at the following address was not found

    http://origin.barackobama.com/issues/urban_policy/%3Cbr%20/%3E
    BarackTV Player -- View More
    Signs of Hope & Change: Election Night
    Login to my.BarackObama.com"

    Either it was scrubbed some time ago or you mis-typed the link, RC.

  • BDB||

    I'd really, really like to see him get any of those things past western and southern Dems in the Senate, let alone the remaining Republicans.

    I'm sure Jon Tester and Jim Webb would love to sign onto that. / sarcasm

    They won't if they want to keep their seats, anyway.

  • Chink Tank||

    China appears to manufacture everything today simply because it has cheap labor and imports pollution.

    I don't get the impression it has freewheeling markets but rather stagnant channels of distribution exactly what kills Japan despite its gung-ho work ethic.

    It's certainly way better off than China even a decade ago, but the command structure will always keep it down.

    Next time you're in Beijing or Shanghai and you see all those buildings, and think wow!remember, this country has 1.3 billion people. You're looking at the veneer.

  • Argon||

    A way to avert financial collapse by securing enough reserves to get them through the down period when (not if) the dollar collapses

    Yes, yes, I've been hearing about the dollar's imminent collapse for decades now.

    Anyways, the investment loss was only the minor half of the problem. The collapse of their economy and mass bankruptcies are a much bigger problem, and one the Chinese are much more interested in preventing.

  • ||

  • Argon||

    So . . do you think the Chinese are overdue (or just "due") for a long term recession and stagnant economy, as Japan experienced in the 90's?

    Well, remember the Chinese are starting from being a basket-case economy like N Korea. They're still very poor compared to Japan circa 1990. They may be able to ride this bubble for another decade or so before they have to move away from a cheap-labor/cheap-goods paradigm.

    OTOH, we're already seeing companies move out of the "expensive" Chinese labor market and into places like Vietnam, which are even further behind.

  • Marketing 101||

    In the absence of information, price determines quality.

    ergo, Bailout=Great Value! Get Yours While Supplies Last!

  • Ignorance Is Strength||

    Either it was scrubbed

    We have always been at war with Eastasia!

  • squarooticus||

    Yes, yes, I've been hearing about the dollar's imminent collapse for decades now.


    It's been doing it in slow motion for decades now: the dollar is worth less than 5% of what it was in 1913.

    What you should be worried about is the Mexican standoff all the foreign dollar holders are in, waiting for one of them to blink and get out of the dollar market while those dollars are still worth something. This is a problem that has only really become a problem over the last 15-20 years as the exportation of our debt has overtaken productivity as the fuel in the US economy.

    The important thing to understand is that this course really isn't sustainable; it's simply a question of [i]when[/i] we'll revert to the mean, which will probably involve a massive over-correction for several years when the dollar becomes like the toxic CDSes banks can't sell for anything near their expected value at maturity.

    Not even the Chinese can keep the music going forever, so at some point they're going to decide there's more to gain by choosing an exit point rather than having one chosen for them.

  • squarooticus||

    I continue to await the day Reason switches to a forum software that supports bbcode. ;-)

  • Argon||

    It's been doing it in slow motion for decades now: the dollar is worth less than 5% of what it was in 1913.

    Um. I'm not sure you understand the difference between inflation and exchange rates.

    This is a problem that has only really become a problem over the last 15-20 years as the exportation of our debt has overtaken productivity as the fuel in the US economy

    Aaaand we've detoured from a day trip into fringeyness over to an all-expenses-paid vacation in crazyland. Well, enjoy your stay.

  • ||

    The only thing you can do to fight like hell is stop putting money in your 401k or at least take it down to the matching level of your employer...then start buying $100-$200 a week in silver and gold physical bullion and hide it somewhere on your property.

    COMEX will eventually defualt and the dollar will be toast...only takes a few billion $ in bullion purchases to end the game.

  • Nate||

    > Stewardess: "Red Wine? That'll be $5."
    >
    > French Woman: "What? I have to pay for the wine? Why don't you just raise the price of the tickets and give us the wine for free?"

    Perhaps her employer covers the cost of the airfare but not "incidentals?"

  • cunnivore||

    Um. I'm not sure you understand the difference between inflation and exchange rates.

    Exchange rates are the best way to measure inflation.

    Measuring the price of consumer goods tends to hide inflation, as increases in production efficiency tend to make prices decrease; if they remain stable, that means inflation has eaten up the price decrease. But it gets reported that inflation is 0%.

  • Diamond in the Ruff||

    Read Jared Diamond's Collapse. Why are we even worrying about financial markets when our imminent ecological demise can be studied in microcosm using archeological tools on the tiny makatea isle of Henderson in the South Pacific?

  • cunnivore||

    You don't have to go to France to see that attitude. Look at those idiotic "fee-free" Southwest Airlines commercials, that claim that other airlines charge you extra for stuff that "should be free", such as curbside checkin and a bunch of other stuff I've never needed when flying. The sense of entitlement there is deafening.

  • HAL-9000||

    Argon:

    I understand the talk about the dollar's demise has been going on for some time, but this one is for real. We've been hiding some pretty outrageous inflation from ourselves by taking the offending paper and putting it on a pallet and shipping it somewhere Out There.

    Whether it was Europe in the 60's (which called our bluff on convertibility), Japan in the 80's, or China in the 90's through now, we've always found some takers for all that excess paper. Only time we didn't have a real good dumping ground for our paper was on poor Jimmy Carter's watch and he paid for it. In the nineties, we actually had a boom with the internet that made for real, physical value to our society that didn't exist before.

    Now we're out of options. The rest of the world is getting tapped out on dollars, and the first sign of that I think to some degree was this housing bubble. Dollars had to go somewhere. As a nation we seem to have said "I'll hide all these spare dollars in my house and no one will notice how much I printed." That only works so long as someone actually believes that a three bedroom McHouse in Chula Vista CA is worth $500,000 in circa 2007 dollars.

    Now that the inflation in housing is wiped out, and we've printed a couple trillion more and pumped it into the pyramid scheme this ultimately is, those dollars are going to show up somewhere again. Its not that houses are worth less, its that we haven't realized houses reflected what a dollar was worth in 2007 while other items did not reflect that in their own prices.

    We're one poorly attended Treasury auction from our bluff as a nation being called by the rest of the world. This upcoming "G20" Summit this weekend is going to be more than interesting, I think. If anything, it will be the world refuting us to some degree, and kicking Bush around as the vessel to pour such scorn into. We'll all laugh along and be happy Uncle Obama is on the way, but Bretton Woods will probably die this weekend, and then the rush will be on in six months no matter how much we print and don't tell.

    Everybody noticed.

  • squarooticus||

    Um. I'm not sure you understand the difference between inflation and exchange rates.


    I am happy to say I have no control over what you believe.

    Inflation is an increase in the money supply. Consumer price inflation attempts to represent the purchasing power of money, but inevitably fails because it involves a subjective basket of goods that is chosen (in typical government fashion) to keep CPI numbers low. Exchange rates are simply how each currency is valued in relation to each other on the open market.

    The US dollar has lost over 95% of its *purchasing power* since 1913. That is what I mean when I say its value is less than 5% of what it was at that time.

    Another example of the difference between inflation and exchange rates is that although the $ is back to about £0.65, the $ has lost *value* (i.e., purchasing power) since the last time it was at that level.

    Do *you* understand?

    Aaaand we've detoured from a day trip into fringeyness over to an all-expenses-paid vacation in crazyland. Well, enjoy your stay.


    Thanks for the heads-up: I will avoid wasting my time on you in the future.

  • squarooticus||

    Exchange rates are the best way to measure inflation.


    False. They are orthogonal. See my last post for an explanation.

  • InNate Behavior||

    Overheard in an office

    Nate: Here's my expense report from my latest business trip.

    Secretary: Sorry, cut backs. These are hard times, so we're not covering extravagant expenses. And that includes red wine consumed during airtravel.

    Nate: Why don't you reduce my salary, so you can continue to cover my expense reports?

  • ||

    First, let me say that I was completely against the bailout. I felt that no matter the chaos that might ensue, the market needed to be allowed to work properly (i.e. punish failure).

    However, I am sick of people constantly talking about the "Wall Street Elite" as if they were the only beneficiaries of this bailout. I'm sure you're all aware that the banks, insurance companies and other financial institutions who received these federal funds employ hundreds of thousands of people, the majority of whom are average, middle class earners. If these institutions had been allowed to "fail", then might we not be looking at hundreds upon hundreds of thousands of "innocent" Americans out of work in a relatively short period of time, with little prospect of re-employment since the whole damn industry seemed to be collapsing on itself?

    Again...I'm not necessarily saying that we shouldn't have allowed this to happen, but we should at least be honest that there would be a lot of low-level jobs lost by people who had absolutely nothing to do with the horrific management decisions made that produced these results.

    If I'm wrong or missing something, please feel free to enlighten me (as if anyone here would hesitate!). Tx.

  • Feeling Free||

    Low level jobs will be lost guaranteed. There will be downsizing at the bigger companies after all the merging is complete.

    The problem with the bailout is that it incorrectly assumes that only very large businesses are sufficiently large enough to do the nation's business.

    The cards are already stacked against smaller businesses. Now they have to compete against failed giants.

    So I think you are missing a huge piece of the problem: our nations well-being does not depend on the well-being of the largest companies but in a fair business environment that all actors can understand.

  • sfb||

    I've waited half my life for GM to go into bankruptcy court. It's time, now.

  • LBO||

    Too bad Yugo isn't still around to buy GM.

  • d||

    Lefti says:

    "No, Matt, the bailout saved capitalism. It's happened before. Of course, I'm talking about real, existing capitalism, not the version of your fervid libertarian imagination. Let's hope those donations keep coming in because this nonsense won't sell."

    Well, there you have it! If you say so, it must be true. Let's not argue with this clearly progressive thinker who (I'm sure) has loads of data to back this drivel up. He just doesn't have the time to share it with us (too busy telling others how to live their lives, I suppose).

  • ||

    Too bad Yugo isn't still around to buy GM.

    It's unlikely they'd be dumb enough to do it.

  • Nate||

    LOL @ InNate Behavior.

  • ||

    ...making guns in this country childproof.

    Now it makes sense.

  • ||

    MKKDASH!,

    I'll tell you what your missing. $1 TRILLION(2 trillion disapeared eysterdya so this is very conservative). Even if it was 10 million middle class jobs lost then we are talking about 100k per unemployed person...if they can't get back on their feet with that then they get the Darwin award.

    plus we get to keep capitalism sounds like a better deal than this to me...what would it take for some people to comprehend that billionaires just stole trillions of dollars? this was not a bailout, it was not a rescue...they just took the money and now it is gone..they happen to be friends, past employers and future employers of bernanke, Paulson, Greenspan etc.

  • Auto Czar||

    Perhaps the Big 3 could switch to toy cars and compete with Matchbox. Then they could easily switch production to China. America would win because the profits would stay in America unlike those unfair profits Japan makes by manufacturing cars in our country.

  • Argon||

    I am happy to say I have no control over what you believe.

    Not as happy as I am to hear it, as you're a raving loon.

    The US dollar has lost over 95% of its *purchasing power* since 1913. That is what I mean when I say its value is less than 5% of what it was at that time.

    Again, you don't seem to understand the difference between inflation and exchange rates. At the risk of infringing on your psychiatrist's turf, I'll point out that most countries have experienced similar inflation. Your statement is meaningless in relation to the currency manipulation issue.

    Whether it was Europe in the 60's (which called our bluff on convertibility), Japan in the 80's, or China in the 90's through now, we've always found some takers for all that excess paper.

    No, no, no, no, no. This is like arguing the horse only appeared because we had a cart to hook it up to. These countries do not buy our debt because they like us, they buy it to manipulate our currency to the favor of their industries. Guess what happens when they stop? Our industries benefit, their industries panic.

  • ||

    Thanks for your comments, Feeling Free and Gabe. Some good points there.

  • ||

    Hey folks, I thought I'd try and engage you in some of my saner shennanigans.

    CFR Crap CO2 paper


    I read this paper recently written by some big wigs about how we should be bullying russia and china into stopping there subsidies for energy consumption in our moral crusade to rid the world of CO2.

    I then emailed my feedback to Mr Levi...it is very calm stuff. What do you think about this type of thing?

    Mr Levi,
    I read your paper on reducing CO2 emissions called "Policies for Developing Country Engagement" . Your team seems to focus on encouraging 8 countries (China, Russia India Iran Indonesia Saudi Arabia .Ukraine & Egypt) to reduce their various subsidies to energy consumption.

    I am surprised that you do not address the subsidies that the American people fund for oil production. There are many prominent foreign policy experts at the CFR who argue that the strategic battles over resources demand these large expenditures. It is widely acknowledged that hundreds of billions of dollars of annual military expenditures are needed by the US to insure the world has access to the oil supply.

    One small example here:

    Greenspan wrote in his recent book "I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil."

    So why would you ignore the billions in subsidies the US gives to BP, Shell, Exxon and others to help promote oil production? It seems the powerful politicos at the CFR would have a better chance of affecting policy in the US than in someplace like Russia or China. Surely Russian and Chinese leaders will see this hypocrisy and wonder why some of the biggest subsidies to the energy industry are ignored in your paper.

  • Argon||

    Now we're out of options. The rest of the world is getting tapped out on dollars,

    Possibly. You saw this start to happen last year, when the dollar began to weaken. Guess what happened to our exports during that period. Guess how overseas companies reacted to this development.

    For decades now, America has been the consumer of last resort (remember the Asian financial crisis? You could stand on the docks on the West Coast and watch all the container ships arrive full and leave empty) and American producers have suffered because of it. We've responded by innovating and streamlining (e.g. in Japan, useless employees have typically been carried until work could be found for them; here, companies couldn't survive such excess) and when the playing field is level our lean, mean companies will devour the competition.

  • squarooticus||

    Not as happy as I am to hear it, as you're a raving loon.


    Why don't you present your side and let your arguments (such as they are) do the talking? Calling me names is not an argument. Go back to third grade if that's all you can manage.

    Again, you don't seem to understand the difference between inflation and exchange rates. At the risk of infringing on your psychiatrist's turf, I'll point out that most countries have experienced similar inflation.


    You mean loss of purchasing power? They are directly related, though inflation is not the only lever on purchasing power. All central banks inflate, which eventually leads to a loss of purchasing power as that money returns to the consumers who use it to purchase things. That's why (as I explained before) the dollar and the pound can be exchanged at the same ratio as several years ago, but each buys less stuff: both the Fed and the BoE are inflating.

    I'll point out that you seem to be the one who is confused about what inflation is.

    These countries do not buy our debt because they like us, they buy it to manipulate our currency to the favor of their industries. Guess what happens when they stop? Our industries benefit, their industries panic.


    Yet this strategy only works so long as they specifically need our consumers to power their industries' growth. Once a better market appears, or a good-enough alternative if holding dollars becomes too expensive relative to the economic growth it's giving them, they will happily let our currency slide and start buying someone else's. There are many indications that this process has already begun.

  • HAL-9000||

    Argon:
    The premise and promise of Bretton Woods: The US Dollar converts to gold at $35 and change an ounce. Keep dollars in your central bank to back your own currency, because dollars are "as good as gold."

    With Europe, specifically France, in the late 60's they called our bluff. They called it by saying they wanted the gold in the treasury instead of paper from the Treasury's printing press. Within five years of that, we closed the "gold window." Before that time, there was no currency manipulation, there wasn't even a currency market like FOREX because EVERY major currency in the world was essentially pegged to the dollar via the gold connection.

    Once we were free of even the illusion of convertibility, it was off to the races. Look at how consumer and public debt has piled up since then by any measure, whether it be in absolute dollars, dollars "adjusted for inflation" or as a percentage of GDP. The charts displaying this basically starts going vertical in 1974. There definitely was a horse from nowhere to hook a cart up to, and that's what we did. How else to explain the debtgasm since 1973 as foreign manipulation of the USA instead of the other way around?

  • ||

    squarerooticus looks more correct than argon to me.

    First off it doesn't matter that our currency has appreciated against zibabwe's over teh last 10 years...we have still seen a loss int he value of the dollar and since our productivity has been positive, we know that absent the counterfeiting done by the fed, then we would have had a dollar that was able to buy more stuff not less.

    The monetary expansion of the Fed since 1913 has destroyed the dollar...the people with the ability to destroy the dollar are no different than a counterfeting gang of armed bandits. Except these armed bandits also put fluoride in our water.

    Most countries that have been buying our debt have been doing so under threat or "agreement" from the military industrial complex/central banker cartel spkoen about in the 1865 article in the London Times:

    "If this mischievous financial policy, which has its origin in North America, shall become endurated down to a fixture, then that Government will furnish its own money without cost. It will pay off debts and be without debt. It will have all the money necessary to carry on its commerce. It will become prosperous without precedent in the history of the world. The brains, and wealth of all countries will go to North America. That country must be destroyed or it will destroy every monarchy on the globe."
    Hazard Circular - London Times 1865

  • ||

    argon, do you think it was moral for FDR to confiscate the privately held gold in our country?

  • squarooticus||

    Except these armed bandits also put fluoride in our water.


    I would say instead, "Except these armed bandits also run the courts." It's a little more to-the-point as to why it's so hard to fix this problem. ;-)

    The brains, and wealth of all countries will go to North America. That country must be destroyed or it will destroy every monarchy on the globe.


    Well, I guess the US succeeded in that, but the cost over time has actually been that the physical capital of the US has largely gone abroad. We do still have a large share of the brains, but we hardly have a monopoly on that.

  • ||

    Squarooticus:

    Don't try to argue with Argon. Just sell him your dollars, in exchange for the worthless gold and silver he is undoubtedly trying to unload.

    Everybody happy then.

    That's what markets are for.

  • Lefiti||

    Stop tormenting me! Wingnuts! Wingnuts!

  • Famous Mortimer||

    Lefiti is smarter than all you guys. You're such wingnuts, with your capitalisty capitalism, it makes me sick.

  • concerned observer||

    Allow me to explain why one's own underwear can be delicious and nutricious.

  • ||

    Please don't associate me with these assholes.

  • ||

    "Once we were free of even the illusion of convertibility, it was off to the races. Look at how consumer and public debt has piled up since then by any measure, whether it be in absolute dollars, dollars "adjusted for inflation" or as a percentage of GDP."

    The collapse of bretton woods didn't cause the twin deficit problem - it collapsed as a result of the burgeoning reality of it.

  • nonPaulogist||

    There seems to be no effective way to restrain the growth of government. The state should be abolished.

  • Douglas Gray||

    The reality was that prior to the current meltdown, both stocks and real estate were way over-valued, with the financial services sector stocks being the most overvalued of all.

    Thus, much of American's supposed "wealth" was virtual, and not real. Allowing the collapse to proceed without intervention would just have allowed us all to see clearly that we were not as wealthy as we thought. This is a painful, but positive process in the long run, as it allows the gap between financial wealth and real assets to narrow again.

    The bailout keeps us comfortably in the world of make believe. Think GM with its liabilities and cash bleed is going to become a sustainable business by throwing a few billion at it? Wishful thinking.

  • nonPaulogist||

    The bail-out was just giving more crack to the addicts while sticking their kids with the tab
    (crack being credit).

  • credit addict||

    I promise I'll get clean. Just let me have one more hit. I know I can get clean if I just get my fix this once.

  • Alan Vanneman||

    I agree with about 85% of Matt says, but I'd point out that the "real" capitalists, i.e., the ones who make a living that way, rather than as professors, journalists, talking heads, etc., were the ones who made the bailouts happen. Where, on Wall Street, was there a single financier who said "hey, we blew it. We deserve to be forced into bankruptcy. The market is always right."

    If capitalists hadn't screwed up in such a monumental fashion, they wouldn't be regarded as overpaid jerks demanding special treatment. When markets screw up this spectacularly, it's hard to believe in the "efficient markets" cant. The people who say that markets never make a mistake are the ones who aren't in the market.

  • ||

    Matt Welch is entirely correct, and the clarion call should be sounded even more loudly.
    There hasn't been a more crucial moment when free markets need to be defended to the utmost vigour in our lifetimes.

  • ||

    Except these armed bandits also put fluoride in our water.

    Woohoo, straight into whack-a-doodle land!!!

    Really, I am sorry about your precious bodily fluids.

  • Jack||

    This is why I only drink rainwater and pure grain alcohol.

  • ||

    If capitalists hadn't screwed up in such a monumental fashion, they wouldn't be regarded as overpaid jerks demanding special treatment.

    Yes, homeownership is just an artifact of the free market. Govt policy has never entered into anyone's mind when contemplating buying a house. The bipartisan desire to drive people into home ownership through tax policy, banking policy, etc. is all just the free market at work.

    There is no hope of defending free markets from minds like that.

  • ||

    French Woman: "What? I have to pay for the wine? Why don't you just raise the price of the tickets and give us the wine for free?"



    Having had exactly the same thoughts myself, I had to stop and ponder this about. Obviously, she's in the same situation I am. I get to expense the price of my plane tickets, but not my wine. So when I have to pay out of my own pocket for wine, or a movie, or (with some airlines) a freaking glass of water, I'm miffed.

    It's just simple selfishness. By raising the price of the ticket, my employer buys the wine and not me.

  • Paul||

    American capitalism will soon look a lot more like European capitalism. Libertarians are on the wrong end of a watershed.

    And we can expect European results: high unemployment, stagnant economies, spiraling government costs, bankrupt healthcare systems, and completely unfunded pension systems for which no answer lies in sight.

    A.S.S.R.A.P.E.* is just the beginning. The Democrats are salivating over this...

    This one is great... one for the record books:

    "We sent a message to Wall Street - the party is over," [Pelosi] said at a press conference with Reid and other Democratic leaders from the House and Senate.



    Yeah, the party's over, and now begins the gala ball with an open bar connected to my credit card.

    *American Structured Securities Rescue Act for a Prudent Economy.

  • economist||

    Paul,
    Please tell me that's an actual bill. That acronym would make my day.

  • Billy Beck||

    Oh, Matt...

    I was doing okay with your article until I got to this --

    "One could perhaps be forgiven for thinking the 20th century's great economic argument had been settled."

    ...and I just could not stop the revolt.

    {sigh}

    Love ya, Babe.

  • nfl jerseys||

    fger

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online

  • Progressive Puritans: From e-cigs to sex classifieds, the once transgressive left wants to criminalize fun.
  • Port Authoritarians: Chris Christie’s Bridgegate scandal
  • The Menace of Secret Government: Obama’s proposed intelligence reforms don’t safeguard civil liberties

SUBSCRIBE

advertisement